FinTech startups are innovative by nature and often work on introducing new concepts within emerging fields such as digital assets. Unfortunately, the regulatory frameworks within these areas usually do not evolve at the same speed. Firms that want to remain competitive in this rapidly evolving landscape will therefore have to take a strategic approach to foster innovation while building trust with regulators.
Why is Compliance Important for High-Growth FinTech Startups?
This current, modern wave of high-growth fintech startups has a unique opportunity to take advantage of the current rapid pace of technological change. Regulatory frameworks such as the Digital Operational Resilience Act (DORA) and the Markets in Crypto-Assets (MiCA) Regulation have laid out a clear roadmap for harmonising reporting requirements for digital asset technologies. Within these clear frameworks, new complexities have emerged that can prove challenging for firms aiming to integrate innovative digital assets within their existing products and services. At the same time, regulators are increasingly focused on the quality of data being reported instead of simply monitoring the timeliness of submissions. This burden of compliance can be particularly difficult to manage for smaller firms that are highly focused on development and growth. To comply with regulatory demands while encouraging competitive innovation, firms must build strong foundations of compliance in cooperation with regulators. This level of early engagement demonstrates a commitment to compliance and will help the firm to remain flexible while adjusting to evolving regulations. The consequences of non-compliance can have a direct impact on the future success of a firm, potentially leading to severe financial penalties or reputational damage that can be hard to overcome.
How can FinTech Firms Build Robust Compliance Frameworks?
Financial services firms can scale their operations while building robust regulatory foundations by focusing on several key areas:
- Early engagement with regulators: Firms should engage with regulators early in the development process and maintain sufficient levels of communication throughout. Firms should be able to demonstrate reasonable attempts to consider compliance as part of innovation, and this can be achieved by working in conjunction with any regulatory support services offered, such as sandboxes or innovation hubs. The European Forum for Innovation Facilitators (EFIF) can also help to foster collaboration with innovation services throughout the EU.
- Strong governance and internal controls: Robust compliance frameworks rely on strong internal governance beyond the traditional Know Your Customer (KYC) and Anti-Money Laundering (AML) processes. Firms are now required to have near-real-time reporting functions that incorporate trade surveillance, and these are much easier to incorporate into the systems at an early stage.
- Implementation of RegTech solutions: Whether firms decide to invest in internal RegTech solutions or outsource to trusted third parties, the development and implementation of RegTech for these purposes will help to build strong foundations of regulatory compliance. This can provide growing firms with the capacity to meet the demands of evolving regulatory requirements through the use of Artificial Intelligence (AI), Machine Learning (ML) and predictive data analytics.
- Building agile and robust frameworks: Compliance frameworks must be robust but flexible enough to adapt as the firm grows in size and complexity. This will involve conducting fit and proper assessments, including mapping cross-border activity and jurisdictional interpretation considerations for global trade.
The Role of Regulatory Sandboxes and Innovation Hubs
Regulatory sandboxes have become increasingly popular over the last few years and offer an effective way for firms to safely innovate in direct partnership with regulators. These controlled environments allow financial services firms of all sizes, from early-stage startups to more established entities, to obtain proof of concept without risking market stability or potentially incurring penalties for non-compliance. This process helps firms to reduce regulatory uncertainty and identify potential issues before launch. The Financial Conduct Authority’s (FCA) Regulatory Sandbox is focused on helping authorised firms within the UK to develop new products and services while also offering support for non-authorised firms that want to test their ideas in a safe and structured environment. Firms that engage with these sandboxes will also be able to access the support of innovation facilitators from across the European Economic Area (EEA) through the EFIF. Fintech startups that consider compliance early and focus on engaging with regulators while building innovative products will be best placed to grow sustainably while maintaining all compliance requirements. Startups should build robust but agile frameworks and consider compliance as a driver for growth instead of an obligation, burden or obstacle to innovation. Building a FinTech startup?
Contact Novatus Global to embed compliance from day one and scale confidently in an evolving regulatory environment.
